At Wednesday’s conclusion of a two-day meeting, the Federal Open Market Committee (FOMC) reiterated that inflation remains elevated, largely reflecting factors that are expected to be transitory.
But it made an addition to its latest policy statement on Wednesday which did not exist in the statement released after the previous meeting on Sept. 22: “Supply and demand imbalances related to the [coronavirus] pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”
Ryan Sweet, a leading US economist at Moody’s Analytics, told Anadolu Agency via email Thursday that “the change is a subtle hint that some angst about how long inflation will remain elevated is creeping into the Fed.”
He said the change could have been made to ensure the Fed does not come across as “tone-deaf” to the acceleration in inflation as he noted other central banks, including the Bank of England and Bank of Canada, have turned more hawkish because of high inflation.
Fed Chairman Jerome Powell told a press conference after the meeting on Wednesday that the bank would use its tools for price stability if inflation moves higher.
“Powell was grilled about inflation and rate hikes during his post-meeting presser,” Sweet said. “Powell provided his definition of ‘transitory,’ as he noted it means different things to different people. He described ‘transitory’ not in the context of time, but rather if the factors behind the acceleration in inflation will permanently lead to higher inflation.”
Dovish stance on interest rates
The FOMC kept its benchmark interest rate unchanged on Wednesday and decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities.
The Fed, however, noted that it is prepared to adjust the pace of net asset purchases if it is warranted by changes in the economic outlook.
“This creates a little uncertainty, as it is unclear what conditions would cause the Fed to either accelerate or slow its monthly asset purchases,” Sweet said.
Mark Zandi, a chief economist at Moody’s Analytics, told Anadolu Agency via email that “the Fed is appropriately saying it may need to be more aggressive in responding by accelerating its tapering and/or pulling forward when it begins to raise rates.”
The rate hikes, for the time being, look far away in the Fed’s agenda, as Powell sounded dovish about their possibility.
“We don’t think it’s a good time to raise interest rates because we want to see the labor market heal further…We have very good reason to think that that will happen as the Delta variant [of COVID-19] declines,” he said at the press conference.
Sweet pointed out that Powell did not push significantly against, nor endorse, markets pricing in two rate hikes next year, unlike European Central Bank President Christine Lagarde last week.
“Powell did sound dovish, stressing that the labor market hasn’t fully recovered and deciding on raising interest rates isn’t something the Fed needs to discuss now,” Sweet said, noting that the Fed chair appears torn between believing the first rate hike will occur in late 2022 or early 2023.
The expert emphasized that the Fed is in a difficult position as pressure is building against high inflation, but he said squashing inflation would hurt the US labor market and delay the American economy returning to full employment.
“This cycle is going to be more similar to a boom-bust than the type of recovery after the Great Recession,” he noted.
Markets take comfort
Amid the dovish stance on interest rates and shift in describing inflation, major indices in the US stock market climbed to new all-time highs late Wednesday.
“Financial markets took comfort that [Fed] policymakers are sticking to the view that the currently high inflation is due to the pandemic, and as the pandemic winds down, inflation will normalize. This suggests they won’t need to pull forward when they begin to raise short-term rates,” Zandi said.
He, however, warned that the pandemic could go in the wrong direction, which would then further exacerbate inflationary pressures and potentially cause inflation expectations to rise.
“But bottom line, the Fed appears comfortable that as the pandemic winds down, the economy will rev up and inflation will rollover. Global investors are very happy with this forecast,” he concluded.
Anadolu with additional input by GVS